Ocean Rig, KB Home, Pactera deals price; new Walter PIKs pummeled; funds gain $455 million

By Paul Deckelman and Paul A. Harris

New York, March 20 - The high-yield primary sphere saw $1.18 billion of new paper come to market in three regularly scheduled forward calendar deals on Thursday - down from the $2.38 billion of dollar-denominated, fully junk-rated paper that had priced in five tranches during Wednesday's more hectic session.

Ocean Rig UDW Inc., an offshore energy drilling contractor based in the Mediterranean island nation of Cyprus, priced $500 million of five-year notes, which traders said moved up a little from their issue price when freed for the aftermarket.

Los Angeles-based builder KB Home opened the door on an upsized $400 million of five-year paper, which was seen later right around its par issue price.

And Chinese consulting and technology services provider Pactera Technology International Ltd. did a $275 million seven-year secured notes offering via a financing subsidiary, but it was not seen in any secondary dealings.

Among the new issues that had priced on Wednesday, traders saw Walter Energy, Inc.'s six-year second-lien PIK notes pounded down more than five points from where they had come to market, although the companion add-on tranche to its existing 2019 secured bonds that also priced as part of that deal seemed to hold its own. But the coal producer's existing older issues were also down multiple points, and its shares plunged some 20%, hurt at least in part by a negative analyst report.

Overall market activity seemed weaker and on the quiet side, with the opening of the televised "March Madness" collegiate basketball championships providing some distraction, traders said.

Statistical market performance measures were mixed for a second consecutive session Thursday after having been higher across the board earlier in the week.

But another indicator - the flow of cash into and out of high-yield mutual funds and exchange-traded funds, considered a key barometer of junk market liquidity trends - posted its sixth consecutive sizable weekly positive number.

Funds gain $455 million

As Thursday's junk market activity was wrapping up, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $455 million more came into high-yield mutual funds and ETF than left them in the week ended Wednesday.

It was the sixth consecutive weekly gain seen by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., following on the heels of a $573 million cash injection during the week ended March 12.

The sixth straight inflows totaled about $4.44 billion, according to a Prospect News analysis of the figures. They included a massive $1.45 billion cash addition recorded during the week ended Feb. 12, the biggest inflow the funds had seen since the week of Oct. 23 last year, when a $2.02 billion net inflow was recorded, according to the analysis.

Including the latest week's results, there have now been nine inflows since the beginning of the year, versus two outflows, resulting in a year-to-date cumulative net inflow of an estimated $3.01 billion, according to the analysis.

Cumulative fund-flow estimates may be revised upward or downward or may be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

In 2013, inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.27 billion, according to the analysis.

Another fund-tracking service, the Cambridge, Mass.-based EPFR Global, meantime reported an inflow for the week of around three times the AMG figure, or around $1.37 billion. It too has seen nine inflows in the 11 weeks since the start of the year.

EPFR's methodology differs from AMG/Lipper's as its fund universe includes many non-U.S.-domiciled mutual funds and ETFs, including strictly European junk funds and broader global funds, versus AMG/Lipper's strictly domestic orientation.

Analysts said that the sustained flows of fresh cash into junk - and the mutual funds and ETFs represent but a small, though very observable and quantifiable percentage of the total amount of investor money coming into or leaving the more than $1 trillion junk market - has been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past two years and which has mostly continued on into this year as well.

Ocean Rig upsizes

There were no a.m.-to-p.m. drive-by dollar-denominated deals during the Thursday session.

All three deals that priced - from three different issuers who raised a combined $1.18 billion - were in the market at least overnight.

One of the three was upsized.

One priced slightly inside the tight end of price talk. One priced at the tight end of talk. And one priced on top of talk.

Ocean Rig UDW priced a $500 million issue of five-year senior notes (Caa1/CCC+) at par to yield 7¼%, on top of yield talk.

Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. were the joint bookrunners for the debt refinancing.

KB Home inside talk

KB Home priced an upsized $400 million issue of non-callable 4¾% five-year senior notes (B2/B) at par to yield 4.748%.

The deal was upsized from $300 million.

The yield printed slightly below the tight end of the 4¾% to 4 7/8% yield talk.

Citigroup Global Markets Inc., BofA Merrill Lynch, Credit Suisse and Deutsche Bank were the joint bookrunners.

The Los Angeles-based homebuilder plans to use the proceeds for general corporate purposes, including the purchase and development of land.

Pactera at the tight end

Pactera Technology priced a $275 million issue of seven-year senior secured notes (Ba3/BB-) at par to yield 8%, at the tight end of the 8% to 8¼% yield talk.

BofA Merrill Lynch was the lead left bookrunner for the acquisition financing. Citigroup and HSBC were the joint bookrunners.

In the wake of those three deals, only one dollar-denominated offering is parked on the calendar as business expected to clear before the end of the week.

Lee Enterprises Inc.'s $400 million offering of eight-year first-lien senior secured notes (B2/B-) is coming together in a high 9% to low 10% yield context, according to an investor who is looking at the deal.

J.P. Morgan Securities LLC and Deutsche Bank are the joint bookrunners.

Brisa prices 3 7/8% notes

The euro-denominated primary market generated news on high-yield corporate deals from England, France, Germany, Spain and Portugal on Thursday.

Brisa Concessao Rodoviaria, SA priced a €300 million issue of 3 7/8% seven-year senior secured notes (Ba2//BBB).

The quick-to-market deal came with guidance in the low 4% context.

Barclays, Caixa-Banco de Investimento, Deutsche Bank, Espirito Santo Investment Bank, Millennium and Santander GBM were the joint lead managers.

The Portuguese freeway concessionaire plans to use the proceeds to refinance medium-term debt and increase its financial flexibility.

Abengoa seven-year bullet

Spanish conglomerate Abengoa Finance SAU plans to price a €400 million offering of non-callable seven-year senior notes (expected ratings B2/B/B+) on Friday.

Global coordinator and bookrunner HSBC will bill and deliver for the debt refinancing deal. Deutsche Bank and Morgan Stanley are also global coordinators and bookrunners. Bankia, Credit Agricole CIB, Natixis, Santander and SG CIB are also bookrunners.

Cabot Financial secured notes

England's Cabot Financial Group Ltd. plans to price a £175 million offering of seven-year senior secured notes (B2/B+) on Friday.

JPMorgan, Deutsche Bank, Lloyds, Royal Bank of Scotland and UBS are managing the acquisition financing deal.

Kaufman & Broad roadshow

France-based real estate developer Kaufman & Broad began a roadshow on Thursday in London for its €370 million offering of five-year senior notes.

Joint global coordinator and physical bookrunner Goldman Sachs will bill and deliver. Credit Suisse and Credit Agricole CIB are also joint global coordinators and physical bookrunners. Natixis is a bookrunner.

Proceeds will be used to repay debt, repurchase preferred shares and for general corporate purposes.

Dürr expected on Monday

Germany's Dürr AG mandated Deutsche Bank and HSBC to organize meetings with fixed-income investors ahead of a contemplated euro-denominated offering of high-yield bonds.

A roadshow is expected to start on Monday and to include stops in Frankfurt, London and Paris.

Ocean Rig seen up

In the secondary arena, a trader saw Ocean Rig UDW's new 7¼% notes due 2019 in a context of 99 7/8 to 100 1/8, straddling the par level at which the $500 million offering had priced.

He said that a little earlier in the session, when the bonds first broke, there had been some trading around 100 3/8 bid, "but then it came back in after a little bit."

A second trader saw the bonds around 100½ to 100 5/8, "but then they just went offered."

Yet another trader pegged the offshore energy driller's new paper at 100 3/8 bid, 100 7/8 offered.

KB Home little changed

There was not much trading in KB Home's 4¾% notes due 2019, which priced at par fairly late in the session.

Two traders said they had not seen any dealings in the homebuilder's bonds.

Another quoted them around par bid, 100½ offered.

Pactera notes not seen

There was no immediate aftermarket activity seen in Pactera Technology International's new 8% senior secured notes due 2021, whose deal came to market via a funding subsidiary, BCP (Singapore)VI Cayman Financing Co. Ltd.

Walter gets walloped

Junk traders said that one of the most notable bond price movements of the day was in the new Walter Energy 11%/12% second-lien senior secured PIK toggle notes due 2020, $350 million of which had priced at par on Wednesday as part of the Birmingham, Ala.-based metallurgical coal producer's upsized $550 million two-part drive-by offering.

One of the traders said that those bonds were trading around the 94 5/8 bid area on Thursday afternoon, well down from their issue price, "and they were quoted most of the day around 94-95ish - and that just seems a little peculiar."

He added that "I don't see why they would trade down 5 points, right out the ball park?"

He suggested that perhaps some investors may have been experiencing "buyers' remorse" for the bonds to price at par and then be down so much the very next morning.

He pointed out that at 941/2, the bonds were carrying a yield to maturity of 12.3% and a 14.85% yield to their first call in April 2017, "so go figure on that one."

Another trader also saw those bonds having been hammered down to 94, terming them "definitely a loser."

One of the traders noted that under the bond's unusual structure, the company could decide to pay its interest in kind, i.e., with new debt rather than cash, "so you'll get another 1%, and the coupon will be 12%, but you'll still only be getting just paper."

The other half of that deal - the $200 million add-on to the company's existing 9½% senior secured notes due 2019 - was quoted by a trader at 101½ bid, 102 offered, about unchanged from the 101½ level at which that tranche had priced on Wednesday after having been upsized from $100 million, yielding 9.147%.

But while those bonds held their own even as the PIKs nose-dived, Walter's existing paper, which had already been sliding in recent days, was also punished.

Its 9 7/8% notes due 2020 lost 4 points on the day to close at 70 bid, while its 8½% notes due 2021, which had traded at 70 on Wednesday, fell 6 points on Thursday to end at 64 bid. Trading volume on each issue was around $7 million, busy enough to locate those bonds on the Most Actives list, even if not necessarily right at the top.

A trader noted that while the new deal "pushed out their maturities a little," with the proceeds to be used to repay in full the company's outstanding $400 million of credit facility term loan A debt maturing in 2016, "they layered $150 million more in debt on top of their senior unsecured notes."

Another market source suggested that Walter's bonds - along with its New York Stock Exchange-traded shares - were plunging in response to a negative research report put out by Bank of America, which warned that supply and demand fundamentals for coal will be "depressed" for the next several years.

While analyst Timna Tanners said that those poor conditions in the coal industry would hurt a number of producers including Walter sector peers like Arch Coal, Inc., Alpha Natural Resources Inc. and Peabody Energy Corp. and she cut her equity price targets for all of them, Walter suffered the biggest cut - to $2 from $8 previously.

Digicel busily traded

Among other deals that priced on Wednesday, a market source said that Digicel Group Ltd.'s new 7 1/8% notes due 2022 were very active, estimating that over $40 million of the Kingston, Jamaica-based Caribbean wireless service provider's new bonds had traded among Regulation S investors. He saw the bonds up about ½ point from the par level at which that $1 billion offering had priced in a quick-to-market transaction, after having been upsized from an originally planned $865 million.

Fresh Cash Financial Services, Inc.'s 6¾% notes due 2021 were seen by a trader having gained 7/8 point to end at 102 3/8% bid, 102 5/8% offered, on top of the already hefty 1½ point gain those bonds had notched in their initial aftermarket dealings on Wednesday.

The Arlington, Texas-based pawn-shop chain operator priced $200 million of the notes at par in a quickly shopped transaction.

Market indicators stay mixed

Statistical junk performance indicators were mixed for a second straight session on Thursday after having been higher across the board on Monday and Tuesday, when they broke out of a recent slump.

The Markit Series 21 CDX North American High Yield index rose by 5/16 point on Thursday to end at 107¾ bid, 107 7/8 offered, bouncing back from Wednesday's ¼ point loss. The index has now been up in three sessions out of the last four.

But the KDP High Yield Daily index and the Merrill Lynch High Yield Master II index both suffered their first losses Thursday after three consecutive gains.

The KDP index slid by a full 13 basis points to close at 74.75 after having risen by 2 bps on Wednesday.

Its yield, meanwhile, rose by 4 bps to 5.28% after having come in over the previous three sessions, including Wednesday's 1 bp narrowing.

The Merrill Lynch index was down by 0.158%, versus Wednesday's 0.078% improvement, its third straight advance.

Thursday's loss dropped its year-to-date return to 2.569% from 2.732% on Wednesday. That cumulative return also remained well below the 2.812% reading seen on March 5, its 2014 peak level.

The index's spread to worst over comparable government paper widened to 398 bps on Thursday from Wednesday's 392 bps spread - its tightest level of the year, reached as Treasury yields rose Wednesday in reaction to the news of what much of the financial community perceives as an unexpectedly more hawkish turn by the Federal Reserve on the timing of potential future interest rate increases. The previous 2014 tight level had been 395 bps, recorded on March 6.

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